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Can China's Yuan Challenge the US Dollar's Global Dominance?

2024-11-01 08:39:16.235000

Recent data from the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) indicate a gradual decline in the US dollar's share of allocated foreign reserves, which now stands at 58%. This decline has coincided with a rise in the shares of nontraditional reserve currencies, including the euro and the Chinese renminbi [4208eae4] [27f4fe5b]. The euro currently accounts for 21% of global foreign exchange reserves, while the renminbi's share of global payments increased from 4% in 2022 to 8% in 2024, although its global reserve share remains at only 3% [12da4bec].

In a recent call to action, experts from Renmin University’s National Academy of Development and Strategy urged the Chinese government to enhance its provision of yuan-denominated loans to developing countries. This strategy aims to support global de-dollarisation and position China as a primary liquidity source in the international market [f7ad9ac2]. Fan Zhiyong, a prominent economist, highlighted the risks of currency mismatch for developing nations, emphasizing that increased yuan financing could mitigate these risks while promoting the international use of the renminbi [f7ad9ac2].

Despite these shifts, the US dollar continues to be the dominant global currency, valued at over $25 trillion. The dollar's supremacy is bolstered by the United States' geopolitical influence, historical legacy, and a robust military budget of $877 billion [12da4bec]. The recent data also highlights that the movement away from dollar dominance is broad and includes major advanced economies and emerging markets. However, contrary to claims that US financial sanctions have accelerated this trend, statistical tests do not indicate an accelerating decline in the dollar's reserve share [4208eae4].

The ongoing decline of the US dollar's share in global reserves is part of a larger trend in the international monetary and reserve system, which is gradually evolving with a shift away from dollar dominance and a rising role for nontraditional currencies enabled by new digital trading technologies [4208eae4] [27f4fe5b]. In September 2024, the yuan was reported as the fifth most-active currency for global payments, holding a 3.61% share [f7ad9ac2]. Major state-owned enterprises, such as China National Offshore Oil Corporation, are actively promoting the use of the yuan in international trade, further supporting its internationalisation efforts [f7ad9ac2].

According to a recent analysis by the World Economic Forum, while the US dollar remains the world's reserve currency, some central bankers and global leaders have called for the advent of a BRIC currency to challenge USD dominance. However, the historical forces that have shaped USD dominance include Bretton Woods, the Marshall Plan, and the Washington Consensus, which are likely to ensure the dollar's position as a reserve currency for the foreseeable future [fe6b4d8e].

In conclusion, while the euro and renminbi are gaining traction, the US dollar remains the dominant currency in global finance. The euro faces challenges such as political fragmentation and differing fiscal policies among EU states, while China grapples with economic issues like massive debt and capital controls [12da4bec]. The ultimate challenge to the USD as a reserve currency may come from within, as debt and dysfunction remain key risks for the US economy [fe6b4d8e].

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